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If you have a car and need cash quickly, an auto equity loan might be a solution. An auto equity loan allows you to borrow money against the value of your car, using your car as collateral to secure the loan. Though an equity loan is related to your car, it actually has more in common with a personal loan, since you can use the proceeds for any purpose.A vehicle equity loan can be a good choice of emergency funding compared with an auto title loan, payday loan, or unsecured personal loan, since annual percentage rates (APRs) are typically lower. However, you need to have a good amount of equity in your car to get one and, should you run into trouble making payments, you could potentially lose your car.Here’s a closer look at auto equity loans, including how they work, how to get one, and how they compare to other personal financing options.
What Is an Auto Equity Loan?
An auto equity loan is a loan that allows you to borrow money against the equity (or ownership) you have in your car. Some lenders allow you to borrow as much as 125% of that equity for up to seven years.Similar to a personal loan, you receive a lump sum up front and then have to repay the borrowed amount (plus interest) via regular, often monthly, payments throughout the term of the loan. Since your car serves as collateral for the loan, the lender has the right to repossess your car and sell it should you stop making payments.
How Do Auto Equity Loans Work?
With a vehicle equity loan, you are borrowing against the amount of equity you have in your car. So if your car is worth $20,000 and you have a loan balance of $7,000, then you have $13,000 worth of equity you can potentially borrow against.Similar to the way most car loans work, an auto equity loan requires using your car as collateral. However, the funds from an auto equity loan are used differently than the funds from a car loan. With a traditional auto loan, the loan proceeds are used to cover the cost of the car. With an auto equity loan, on the other hand, the loan proceeds can be used to cover whatever you want, making it more like a personal loan. Recommended: How Do Personal Loans Work?
How Can You Get an Auto Equity Loan?
The process for getting an auto equity loan will differ depending on the lender, but here are the steps that are typically involved.
1. Make Sure You Have Equity In the Car
To determine your equity, you’ll want to first determine how much your car is worth. You can do this by using an industry guide, such as Kelley Blue Book or Edmunds. If you don’t fully own your vehicle, you’ll need to subtract how much you owe on your car loan from what the car is worth. If your equity is on the low side, you may want to look into ways to increase the value of the car.
2. Find a Lender
These loans typically aren’t offered by large U.S. banks. Your best bet is to check with local credit unions, your current auto loan lender (if you still have a loan), and search for online lenders. It can be a good idea to shop around and compare offers from multiple lenders.
3. Apply for the Loan
Once you determine which lender you want to work with, you will apply for the loan. Lenders will typically want to know your income, credit score, the details of your car, and details of any auto loans you already have. The terms of your auto equity loan will depend on the value of your equity, your credit history and credit scores, and your income.
4. Pay Off Your Loan
If you are approved, you’ll want to be sure to get all of your payments in on time and fully pay what you owe by the loan's maturity date. After all, your car is on the line. Setting up autopay can help ensure you don’t miss a payment.
Can You Get an Auto Equity Loan Frequently?
Theoretically, you can get auto equity loans frequently. Once you repay your auto equity loan, you can apply for another one, as long as you still have equity in your car. Of course, you will need to qualify for the second loan just like you needed to qualify for the first loan. Since you’re using your car as collateral, you would not be able to get multiple auto equity loans at one time with different lenders.
Auto Title Loan vs Auto Equity Loans: Similarities & Differences
Auto equity loans and auto title loans are both based on the amount of equity you have in your car. For both, you generally have to offer your car title (a certificate that shows proof of ownership and includes identifying information about the vehicle) as collateral for the duration of the loan. However, these are very different loan products. Auto title loans are short-term loans (often only a month or less) aimed at borrowers with bad credit who need funds quickly. They typically come with high rates and can be highly risky for borrowers – if you can’t pay the money back within that short time frame, you can lose your car.Auto equity loans are generally considered a safer, less costly form of financing. They come with longer terms (from several months to years) and rates are typically lower than what you might get with an auto title loan.Recommended: Can You Refinance a Car Loan With Bad Credit?
Auto Equity Loans vs Refinancing a Car Loan
Refinancing a car loan means replacing your current auto loan with a new one. The new loan pays off your original loan, and you begin making monthly payments on the new loan. Unlike auto equity loans, refinancing a car loan doesn’t give you a lump sum of cash upfront. However, it can potentially give you access to more cash each month by lowering your monthly car payment or decreasing the amount of interest you pay. If you’re struggling to make your monthly car payments, you might want to consider refinancing your car loan rather than getting an auto equity loan.
Pros of Auto Equity Loans
There are several benefits of auto equity loans. These include:
Quick access to cash. The application process and time to funding is often much faster than it is with other types of loans. In fact, once approved, you may get the money deposited into your account on the same day.
Less costly than some other funding options. Auto equity loans usually have lower rates than unsecured loans (like credit cards or unsecured personal loans). This is because your car serves as collateral, which lowers risk to the lender.
Flexible repayment options. You can often choose between a short- or long-term auto equity loan.
Relatively easy to qualify for. Because your car serves as collateral, lowering risk to the lender, qualification requirements for these loans are often lower than they are for other loans. If you are the only owner of your car and have a positive equity position, you have a strong chance of qualifying for an auto equity loan.
Cons of Auto Equity Loans
Although there are positives to auto equity loans, there are also a number of negatives. These include:
You could potentially lose your car. These loans use your car as collateral. So, should you default on your payments, the lender is allowed to seize it.
You may end up working with multiple lenders. Your current lender may not offer auto equity loans, which means you would need to search elsewhere and keep track of a more complicated loan situation.
You will likely need full-coverage insurance on your car. Auto equity loan lenders typically require proof of full-coverage car insurance, not just the state-required minimum liability insurance, on your car. This could add an extra cost to your monthly insurance.
Can be hard to find. Auto equity loans are not very common, so you may have to do some digging to find one.
Auto Equity Loan Alternatives
If you need cash quickly and do not want an auto equity loan, you have other options. Here are some you may want to consider.
Personal Loan
If you have good credit, you may be able to qualify for an unsecured personal loan, which doesn’t require putting up any collateral. Without collateral, however, you will likely pay more in interest than you would with a secured loan. However, you won’t be risking any assets, like your car. Personal loans are offered by banks, credit unions, and online lenders.
Credit Cards
If you need cash quickly to pay for upcoming expenses, you may want to consider using a credit card, especially if you can score one with a 0% (or low) APR introductory rate. Unlike an auto equity loan, you won’t have to put your car up for collateral. However, if you are unable to pay off your balance before the promotional rate ends, you can end up paying a very high interest rate.
Auto Title Loans
If you’re looking for a very short-term cash solution, you might consider an auto title loan. Just keep in mind that rates for this type of loan can be high and if you don’t repay it within the loan’s short term, you could end up losing your car.
Refinancing a Car Loan
While refinancing won't provide you with a lump sum of money in the way an auto equity loan can, it could lower your car payments and, in turn, free up some extra cash each month. You’ll want to be sure that you understand how auto loan refinancing works before committing to anything, however.
The Takeaway
Auto equity loans let you borrow against the equity in your car and can help you access a lump sum of cash quickly. Because your car acts as collateral for the loan, interest rates (and qualification requirements) tend to be lower than they are with other types of personal financing. However, you risk losing your car if you aren’t able to keep up with the payments.
Frequently Asked Questions
What is an auto equity loan?
Is an auto equity loan the same as refinancing your vehicle?
How frequently can you get an auto equity loan?
Photo credit: iStock/simon2579
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About the Author
Jason Steele
Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
